IT firm iGate sacks CEO over undisclosed relationship

Phaneesh Murthy poses during the World Economic Forum (WEF) in Davos, January 26, 2013.

Reuters/Denis Balibouse

MUMBAI/BANGALORE (Reuters) - IT outsourcing company iGate Corp sacked Chief Executive Phaneesh Murthy after a company sexual harassment investigation revealed that he had not disclosed a relationship with a subordinate.

Shares of the company fell 13 percent on the Nasdaq after the removal of Murthy, who led several initiatives to improve the company's performance such as charging clients for business results instead of man hours, the billing method more commonly used by IT outsourcing firms.

Murthy, one of the industry's best-known executives, was forced to quit India's second-biggest software services exporter Infosys Ltd in 2002, following a sexual harassment lawsuit, which was settled out of court.

Speaking to reporters after iGate announced his departure, Murthy said he had informed the company chairman about his relationship with the female employee a few weeks ago.

IGate said its investigation showed Murthy had violated company policy by failing to report his relationship with the employee. Murthy did not violate iGate's harassment policy, the company said in a statement.

"The board's decision was made as a result of an investigation by outside legal counsel, engaged by the board, of the facts and circumstances surrounding a relationship Mr Murthy had with a subordinate employee and a claim of sexual harassment," iGate said in a statement dated May 20.

A company spokesman did not respond to requests for further information. Murthy was replaced with immediate effect by interim CEO Gerhard Watzinger, the company said in the statement.

Fremont, California-based iGate and other smaller IT outsourcing services providers compete with Indian heavyweights such as Tata Consultancy Services, Wipro and Infosys on price to win market share.

"(The) development should negatively impact the company's brand and may negatively impact growth prospects given the stature of Mr Murthy and his involvement in marketing the company's vision to clients/prospects," Noble Financial analyst Vince Colicchio said.

In recent months, the company had issued advertisements in international media mocking the IT outsourcing sector's traditional billing model.

Murthy's billing strategy is meant to appeal to clients with less-certain budgets in a tough economy.

Frederic Giron, principal analyst at Forrester Research, said Murthy's departure did not necessarily mean the company would abandon the changes he had spearheaded.

"While it is still unclear if initiatives ... will survive under a new leadership, I would assume so, since the transformation has been under way for about two years," he said.

Murthy was a rising star at Infosys and was seen by many as on track to be the company's first non-founder chief executive before the sexual harassment lawsuit abruptly ended his tenure.

After leaving Infosys, Murthy founded a company that was bought by iGate. In 2011, he teamed up with buyout firm Apax Partners for iGate's $1.2 billion purchase of much-bigger Indian rival Patni Computer Systems.

IGate shares, and revenue, have more than quadrupled since Murthy joined the company in mid-2003, according to Reuters data. The stock has gained 4 percent in 2013, lagging the S&P 500 IT consultancy subindex, which is up 8.8 percent.

The company's stock fell to $14.25 Tuesday on the Nasdaq, its lowest in 18 months.